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Chesapeake increases loan to $4 billion

Chesapeake Energy Corp. increased the amount of its most recent loan on Tuesday even as the company's debt was downgraded.
by Adam Wilmoth Published: May 15, 2012

Chesapeake Energy Corp. increased the amount of its most recent loan on Tuesday even as the company's debt rating was downgraded.

The company also reported that it had nearly maxed out its $4 billion revolving credit before obtaining the new loan.

The Oklahoma City energy company said it increased its previously announced senior unsecured loan from Goldman Sachs Bank USA and Jefferies Group Inc. to $4 billion, up from the $3 billion announced Friday and discussed Monday on a conference call with analysts.

The company attributed the increase to strong demand from investors willing to buy the debt.

“We appreciate this strong vote of confidence from investors,” Chesapeake CEO Aubrey McClendon said in a statement Tuesday. “As discussed in yesterday's conference call, this will give us greatly enhanced financial flexibility to execute our planned asset sales from a position of strength and to complete our transformation from a natural gas-focused producer to a more balanced liquids-focused producer.”

The announcement came hours after credit ratings agency Standard & Poor's downgraded Chesapeake's senior unsecured debt to “BB-,” three levels below investment grade, in part because of fears that Chesapeake's debt levels could climb high enough to trigger default on some loans.

Lower debt ratings can make it more difficult and more expensive for companies to borrow money.

“The downgrade reflects mounting turmoil stemming from revelations that underscore shortcomings in Chesapeake's corporate governance practices, covenant concerns, and the likelihood Chesapeake will face an even wider gap between its operating cash flow and planned capital expenditures than we had previously anticipated,” S&P stated in its report Tuesday.

The ratings agency said it was most concerned with requirements included in some of Chesapeake's existing loans that the company's debt cannot climb above a certain level relative to earnings.

The loan covenants state that Chesapeake's debt cannot exceed four times its lagging 12-month earnings before interest, taxes, depreciation and amortization (EBITDA).

“We believe that if EBITDA remains at the weak level of the first quarter ($838 million) or worse, as we anticipate, without a significant reduction in reported total debt from the level at March 31, 2012 ($13.1 billion), Chesapeake could breach this covenant within the next three quarters,” S&P wrote Tuesday.

Bernstein Research analyst Bob Brackett reached a similar conclusion in his analyst report issued Monday.

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by Adam Wilmoth
Energy Editor
Adam Wilmoth returned to The Oklahoman as energy editor in 2012 after working for four years in public relations. He previously spent seven years as a business reporter at The Oklahoman, including five years covering the state's energy sector....
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